|Random Thoughts: The Hope Trade Cometh|
By Todd Harrison SEP 27, 2011 10:30 AM
Policymakers float potential solutions through the media.
It’s Turnaround Tuesday in the ‘Ville and the legend is living up to its name. Equity markets are indicated higher, the dollar is down a full percent, and Europe is getting some groove on -- although the German market has simply rallied back to the global line in the sand at DAX 5500.
Why the sudden spring in the equity step? European “hope,” consistent with what was communicated yesterday. It would appear, however, the Policy Bazooka may take a different form, although any solution is subject to sovereign scrutiny and, by extension, political risk.
As shared (with permission) by the astute Phil Rosato:
“CNBC’s Steve Liesman broke the European Financial Stability Facility (EFSF) expansion story yesterday and the Dow breached 11,000. We know the ridiculousness of the statement -- it's not a new story, and implementation is still a ways off -- and the risk to the upside is continued momentum (and/or performance anxiety).
The EU has heard from the entire globe (including Treasury Secretary Tim Geithner) at the World Bank/IMF meeting. Let’s circle back to what (new) form the EFSF may take along with possible ECB measures (on October 6?):
- Lever money from EFSF(10x?) and seed money for Euro International Bank (EIB).
- EIB forms a special purpose vehicle; SPV issues bonds and purchases sovereign debt.
- EIB bonds used as collateral with ECB (loosen credit, provide liquidity).
- Part of EFSF money to shore up bank capital and alleviate suspicions regarding capital strength; opens up interbank funding markets.
- ECB could re-launch covered bond purchase (stealth QE).
- EU banks may use covered bonds as a funding mechanism.
- ECB could re-launch 12M loans (presently 6M).
Please note that Germany is voting on EFSF ratification on Thursday/Friday but this has nothing to do with the above-mentioned plan. Rather, it would allow the EFSF (in present form) to purchase bonds in the open market. Thirteen other EU nations will have to do the same (some votes aren't until November).
What's different now from last week when EU finance ministers were taking Geithner to task regarding a potential Euro TARP? The market. We retraced another 6% last week with the banks taking the brunt of the selling.
Would such measures, if adopted, rally markets? Absolutely. However, we're dealing with a 17-block Union that has done nothing but drag their feet and an ECB that raised rates two of last four months. Yesterday's rally -- like most in the second half of 2011 -- was a “risk to the upside trade". All of the above is market chatter and none of it is concrete. The market will continue to dictate policy, not the politicians.